SERVICING RIGHTS

3 Months Ended

Mar. 31, 2018

7.SERVICING RIGHTS

Mortgage Loans

Mortgage servicing rights (“MSRs”) are recorded when loans are sold in the secondary market with servicing retained. As of March 31, 2018, the Corporation had obligations to service approximately $195.235 million of residential first mortgage loans. The valuation of MSRs is based upon the net present value of the projected revenues over the expected life of the loans being serviced, as reduced by estimated internal costs to service these loans. The fair value of the capitalized servicing rights approximates the carrying value which management estimates at $1.737 million On a quarterly basis, management evaluates the MSRs for impairment. The key economic assumptions used in determining the fair value of the MSRs include an annual constant prepayment speed of 10.57% and a discount rate of 10.17% for March 31, 2018. In 2016, management decided to no longer regularly retain the servicing on mortgage loans sold.

The following table summarizes MSRs capitalized and amortized, along with the aggregate activity in related valuation allowances (dollars in thousands):


	March 31,		March 31,
	2018		2017
Balance at beginning of period	$	1,033	$	1,573
Amortization		(108)		(141)

Balance at end of period	$	925	$	1,432
Balance of loan servicing portfolio	$	195,235	$	215,730
Mortgage servicing rights as % of portfolio		.47%		.66%

Commercial Loans

The Corporation periodically retains the servicing on certain commercial loans that have been sold. These loans were originated and underwritten under the SBA and USDA government guarantee programs, in which the guaranteed portion of the loan was sold to a third party with servicing retained. The balance of these sold loans with servicing retained at March 31, 2018 and March 31, 2017 was approximately $54 million and $55 million, respectively. The Corporation valued these servicing rights at $.102 million as of March 31, 2018 and at $.132 million as of March 31, 2017. This valuation was established in consideration of the discounted cash flow of net expected servicing income over the life of the loans.